Shares of chipmaker Avago Technologies Limited AVGO have charted an impressive climb of 564% over the last five years, and it seems that insiders feel it is the right time to cash in.
Avago’s COO (Chief Operating Officer) Bryan Ingram has been selling chunks of his holding in the company’s shares. Per an SEC filing, his latest offloading constitutes 60,219 shares, which fetched him $8.5 million in the open market on Jun 18.
The sale was preceded by another earlier in the month, involving the sale of 66,395 shares, most of which were acquired via exercising of stock options.
Shares of Avago registered a 52-week high on Jun 1, as the stock price soared to $150.5, whilst the 52-week low of $68.71 had come to pass a long while back, in Aug 2014. The stock has climbed 102.7% over the past year, relative to the S&P 500’s humble 8.9% return.
Is Insider Selling a Red Flag?
Insider selling has always made investors watchful and sceptical, but a stake sale by a single insider doesn’t necessarily portend bad times for the company. The reason could be as simple as the fact that the COO is simply cashing in on the stock’s robust run over the past.
However, insider selling is becoming a trend of sorts for this chipmaker of late. In June alone, Avago insiders have jettisoned 286,953 shares of stock, which is over and above the hundreds of thousands of shares that they have sold earlier in the year. This amounts to some pretty massive offloading, and maybe, just maybe, investors should have some qualms about the company’s future prospects.
Another reason could be that in light of the stock’s remarkable appreciation, insiders feel that the trend is not sustainable for an extended period of time. This seems to be the more likely reason, given the stock’s high valuation, which has not really been driven by a corresponding jump in earnings.
We recommend that investors should be vigilant with regard to the company’s operations in the coming times. Any signs of weakness displayed by Avago should serve as confirmation that insiders judge the company to have weaker fundamentals than the market believes.
The Avago-Broadcom Merger
In early June, Avago inked a deal to acquire Broadcom Corp. BRCM for $37 billion, creating a semiconductor titan that will be able to stand shoulder-to-shoulder with industry giants QUALCOMM Inc.QCOM and Intel Corp. INTC. The deal is expected to unlock significant annual cost synergies amounting to over $750 million within the first 18 months.
There is hardly any product overlap in the two company’s portfolios, which will enable them to expand their combined footprint in the semiconductor space. However, the deal didn't come cheap as it will be funded with huge amount of fresh debt (about $9 billion), and the resulting servicing costs will absorb some of the enhanced earnings of the combined entity.
There will be integration issues as well, which will likely impair both sales and profits for a while. The merger might create value for shareholders over the long term, but as of now, it looks like investors could be in for a few stingy years.
Avago presently carries a Zacks Rank #3 (Hold).
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